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Features : Changing Investment Strategies

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Credit market turmoil has forced corporate treasurers to re-evaluate their investment strategies. They are scrutinizing short-term investments for their strength and creditworthiness and demanding much greater information from the banks with whom they partner.

No longer are corporate treasurers willing to simply trust what their bankers or the credit rating agencies tell them when it comes to investing excess cash. The credit market turmoil is causing a revolution in the short-term investment practices of corporates—both at the treasury level and at the board level—as they struggle to digest exactly how the credit turmoil has affected their companies, their liquidity and their investments.

The credit crunch and its subsequent effects on short-term instruments have affected the corporate treasury space both as direct investors in the money markets themselves and as users of money market funds. “There has been a clear impact on anyone who invests in the short end of the markets,” says Jonathan Curry, chairman of the Institutional Money Market Funds Association’s technical committee. “It is not just [commercial paper] or [special investment vehicles] that have been affected. Auction rate securities and other asset types have also had challenges during the last 12 months.”

Attenborough: Treasurers are looking harder at underlying risks.

Corporates that have always used money market funds will probably continue to do so, Curry says, but they will study more deeply each provider’s capabilities when choosing a manager. Traditionally, corporate treasurers have often used triple-A-rated money market funds, taking comfort from the AAA rating. However, recent market disruptions have challenged widely held assumptions of what constitutes “triple-A” and how “risk free” such funds might be. “Treasurers are either voluntarily, or as a result of board demands, looking at what the underlying exposures are and demanding greater transparency,” says Tristan Attenborough, a managing director for treasury products at JPMorgan.

According to Curry, it is important to differentiate between triple-A money market funds (MMFs) and other cash funds, as there has been a big difference in the performance of the two. “That is important to highlight because we have also seen, particularly in Europe, some confusion between triple-A stable [net-asset-value, or NAV] money market funds and other types of cash funds, such as Libor target funds or enhanced cash funds,” he says. “The funds in those buckets have been lumped in the money market fund bucket, which risks misinforming investors. True triple-A, stable net-asset-value MMFs are enjoying the benefits of this flight to quality.”

“One of the key things that we’ve seen is a flight to quality into money market funds, and that has been seen both in the United States and in the European markets,” Curry adds. “We have seen very sharp growth over the last 12 months in triple-A stable NAV money market funds.”

This flight to quality has led to huge growth in government money market funds—those funds that consist solely of government risk. As treasurers, and investors in general, increasingly look to reduce their exposure to uncertain credits, they are increasingly moving their investment into highly secure government credit and taking the yield impact that means. This is particularly prevalent in US dollars, both in the onshore US market and the eurodollar market.

It has also led to the growth of euro and sterling money market funds, which is a new development. People are creating government funds in euros and sterling to sit alongside the US dollar government products that have been in existence for many years.

Rossi: There is less tolerance for lower-rated instruments now.

Lisa Rossi, head of liquidity management for global transaction banking at Deutsche Bank, says: “They are also looking for shorter-term duration—to be sure they can access liquidity should they need it. And while their investment governance policies might allow them to invest in less than triple-A corporate debt, they are staying up there at triple-A ratings. There is less tolerance for lower-rated instruments that are out there right now.”

Treasurers are reassessing the balance among yield, risk, liquidity and convenience in their cash investment strategies. As this review takes place, they are looking for independent sources of information on investment choices to supplement the transparency around investment risk being taken. From a corporate-board-level perspective, there will likely be some changes in investment policy. For example, there could be a move toward a fully outsourced model or completely the opposite—to keep investment management wholly internal with greater internal oversight and controls in place.

Corporates are no longer content to view the ratings from the agencies as enough information. Over the past few years, as many treasury departments downsized, they had to rely more on outside rating agency analysis and outside analysts, but now they are once again doing a lot more due diligence themselves. This includes increased discussion on types of securities that money market funds hold, how banks evaluate the credit risk of other banks or how they can increase diversification without adding operating overhead.

Notes Attenborough: “It remains to be seen whether this trend will result in a permanent shift in investment policy or whether yield will return to drive the buying criteria.”

MANAGING LIQUIDITY
The credit crunch has had a huge impact on corporate treasuries, as companies not only re-examine their investment portfolios but also hunker down and hold on to that liquidity in order to ensure it is available when they need it. Ron Wessels, group treasurer at wine and spirits distributor Maxxium Worldwide, says treasurers are very focused on managing liquidity right now. “We are trying to be even more efficient with our spare cash, but that always should be a first priority for any corporate,” he says.

“As a result of the credit crunch,” says Lisa Rossi at Deutsche Bank, “you are seeing less investment, seeing more people hold onto cash because liquidity is very important, and there is less liquidity going back and forth between banks, and between banks and corporates. It is a tighter market right now.”

Wessels adds: “We are looking at our banks and looking to establish more long-term relationships to safeguard any investments that we have to maintain flawless treasury operations. There is less appetite [among banks] to put money with corporates,” he continues. “Confidence is increasingly negative, and pricing is going up. Banks are not that eager to lend out their balance sheet, although the interest rates are pretty good in Europe.”